"Union Arguments for Shorter Hours"

In the summer of 1959, Loren Goldner and I hung out together at the City of Berkeley's Camp Cazadero. Loren called me "Stick" because I was skinny and because my last name was Walker. Walking stick > Stick Walker. I'm not sure if that was the year the boys' camp did a talent show skit based on exclamatory action comic book sound-effects words.

Pow! Bam! Gulp! Rat-a-tat-tat! Neeeiyow! Vrooom!

When I came across this Hours of Work pamphlet, below, the author's name and affiliation with UC Berkeley were sure tip-offs that it was by my old camp buddy Loren's dad. Inside is the only extant artist's depiction of a "lump of work." The pamphlet also contains one of the most tantalizingly ambiguous "refutations" of union arguments that shorter hours create more jobs:

The fear of unemployment runs through much of the trade unions' justification for shorter hours. In the last half of the nineteenth century, the make-work idea was expressed in its very crudest form. The concept prevailed that there was just a given 'lump of work." Shorter hours of work meant that more men had to be found to do the job. Increased demand for workers, labor contended, drove wages up. 

After World War I, the economic arguments made by unions became more refined, but the basic ingredients were the same. Unions argued that shortened hours coupled with higher wages and employment increased total spending; increased purchases led to more production, and this, in turn, created even more employment. 

Actually, the 'lump of work" argument and its more complicated variation described above fail to consider two important factors. First, changes in hours of work are frequently accompanied by changes in productivity. If per unit costs of production decrease with shortened hours and increased productivity, there is a possibility that lower prices will expand demand. The "lump of work" grows larger under these commonly occurring circumstances. 

Secondly, there are usually other economic factors at work which tangibly increase the "lump of work." 

Actually, the first factor reinforces the "more refined" economic arguments for shorter hours. To reiterate: shorter hours lead to increased productivity resulting in lower prices that expand demand thereby creating jobs. The second factor simply affirms that ceteris is not paribus and thus is irrelevant to the refined arguments. In short, Goldner confirmed that shorter hours may indeed create more jobs but not for the "crude" or "refined" reasons that the pamphlet attributes to union advocates of shorter hours. 

The logical/rhetorical gymnastics are dazzling. 

Who said there was just a given lump of work? 

Well, the unions didn't actually say it but it can be "inferred" from their advocacy of shorter hours. 

What were the "basic ingredients" that stayed the same between the crude and the refined arguments?

That shorter hours created more employment. 

What "important factors" did both the nineteenth century argument and its more complicated post-World War I successor "fail to consider"? 

Well, um, that the jobs resulting from the productivity gains from shorter hours made the lump of work grow larger, therefore there wasn't a fixed lump of work.


In other words, it's like those math exams in high school where you get marked wrong even though you got the right answer because your pencil work didn't conform to the way they did the proof in the textbook. Only in this case, it is as if the teacher ignores what you actually wrote and marks you on the basis of what he assumes you must have been thinking based on who your friends are and what desk you sit at in class.

I should mention, in passing, that the editor of the pamphlet was Irving Bernstein, whose 1946 article "Labor and the Recovery Program" supplied a key detail for my post on "The Black bill, Green and the Blue Eagle."

What is it?

Economic Law and Order

The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread. -- Anatole France

Economists forget, at their peril and ours, that "economic laws" are contingent on "The Law," in Anatole France's sense. When the rich find it convenient to house their servants under bridges, the majestic law that forbids both rich and poor to sleep there will go unenforced or be repealed.

The "law of supply and demand" is no exception. Nor is "Say's" law of markets (which I would prefer to call the law that a cheap market will always be full of customers).

The repeal in 1814 of the apprenticeship clauses of the Elizabethan Statute of Apprentices may appear to be of no more than antiquarian interest. From today's perspective, the ancient requirement of seven years servitude to qualify for particular trades would be indefensible. In this case, at least, laissez faire does indeed seem more reasonable than the letter of the old law. But there was a darker subtext to the agitation for repeal. Combinations of workers were illegal; petitioning for enforcement of the law gave tradesmen a legal loophole under which they could conduct a semblance of collective bargaining.

The decisive argument in favor of repeal -- which according to T.K. Derry, "echoed through the debates" -- was the one Serjeant Arthur Onslow, M.P. outlined in a speech of April 27, 1814: ",,,the continuance of this law is highly prejudicial, and affording a color for the most dangerous combinations: nothing would so much tend to unnerve them, as repealing these restrictions."

Viewed in isolation from its historical context and the complex of other legal restrictions, repeal of the apprenticeship clause seems to make "economic" sense. In context, though, it appears as a strategic manoeuvre to suppress a residual avenue for redress available to a politically disenfranchised group. There are no "economic laws" in isolation from their historical and legal contexts.

The Black bill, Green and the Blue Eagle: "to bargain collectively through representatives of their own choosing"

The story is told by three of the key actors, Frances Perkins, Leon Keyserling and Rexford Tugwell, of how the Roosevelt administration, in its eagerness to "get rid" of the Black thirty-hour bill and to put something in its replacement to placate labor, incorporated the right to collective bargaining in section 7(a) of the National Industrial Recovery Act.

"When we first came to Washington in 1933," Perkins wrote in her memoir, The Roosevelt I Knew, "the Black bill was already before the Congress. Introduced by Senator Hugo L. Black, it had received support from many parts of the country and from many representatives and senators." Meanwhile, according to Keyserling, the architects of the NRA "would not have included either Section 7(a) or the wage or hour or labor standard provisions. These emerged through a series of haphazard accidents reflecting the desire to get rid of  the Black bill and to put something in to satisfy labor." "It will be remembered," confirmed Tugwell in his memoir, "that one of the reasons why NRA was sponsored by Roosevelt, and why the act was passed in the special session of spring, was the threat of a thirty-hour law being pushed by Senator Hugo Black."

Perkins chronicled the events leading up to the scuttling of the House (Connerly) version of the Black bill. The Senate had already approved the measure by a vote of 53 to 30:

Roosevelt had a problem. He was in favor of limiting the hours of labor for humanitarian and possibly for economic reasons and therefore did not want to oppose the bill. At the same time, he did not feel that it was sound to support it vigorously. But the agitation for the bill was strong. Its proponent insisted that it was a vital step toward licking the depression. I said, "Mr. President, we have to take a position. I'll take the position, but I want to be sure that it is in harmony with your principles and policy." 

Finally we agreed that I should go before the congressional committee holding hearings on the bill. I would propose amendments to guarantee a floor under wages, that is, some kind of minimum wage machinery. I would point out the necessity for possibilities of variation from the strict application of the thirty-hour week. ... 

So I went, with his encouragement, to testify. It was a trying experience. Except for my appearance for the bill providing for the Civilian Conservation Corps, it was my first appearance as a cabinet member before a committee of Congress, and this was a full dress affair. Senator Black apparently wanted it that way. Furthermore the attendance of Miss MacDonald and Mrs. Roosevelt made it a matter of considerable publicity. One could not avoid the ballyhoo of the photographers, the press, the radio, the klieg lights... .

At any rate, Roosevelt was fully committed. From that time on, Congress, the newspapers, the people, knew he was in favor of doing something by law to mitigate the hardships of unemployment by techniques of control of hours, wages, and working conditions. He was committed to the principle but not to this particular program. 

The Black bill did not go through. Instead, the National Industrial Recovery Act was evolved and adapted. Some biographers of Roosevelt have gone so far as to say that Roosevelt betrayed the Black bill in favor of the National Industrial Recovery Act. They regard this as disloyalty to principle. They say that the Senate committee was about to add a paragraph to the bill which would have set up a minimum wage principle. But those of us who were close to the situation could not detect, at any time, that the adoption of a minimum wage clause was in the making. And, as events showed, the Supreme Court in those days would surely have found the Black bill unconstitutional.

Perkins, Ishbel MacDonald and Eleanor Roosevelt descending the steps of the Capitol after attending House Labor Committee hearings on the thirty-hour bill

Perkins left out of her account a crucial detail -- the amendment to the House thirty-hour bill offered by the president of the American Federation of Labor, William Green. Irving Bernstein supplied the missing detail in his 1946 account of "Labor and the Recovery Program." After mentioning that Perkins had not consulted the A.F. of L. about her proposed amendments to the thirty-hour bill, which "did not raise her in its esteem," Bernstein presented the following account of President Green's House Labor Committee testimony:

He did not approve the increase in maximum hours, but accepted it on the ground that it represented the viewpoint of the Labor Department and the Administration. Minimum wages, however, were opposed, except insofar as they applied to women and children. The federation traditionally rejected legal minimum wages, since they tended to become maximum wages and thereby lowered the rates of high-paid workers. The tripartite boards would not act in the interest of labor where collective bargaining did not exist. He urged, therefore, that the bill be amended to guarantee workers "the free exercise of the right to belong to a bona fide labor organization and to collectively bargain for their wages through their own chosen representatives."

The wording of that amendment was not completely original. During World War I, the National War Labor Board had stipulated that "The right of workers to organize in trade unions and to bargain collectively through chosen representatives is recognized and affirmed." In 1919, President Woodrow Wilson convened a "First Industrial Congress," with representatives from business, labor and "the general public" (more businessmen), at which the labor group proposed a resolution, vigorously opposed by business, that affirmed, "The right of wage earners to be represented by representatives of their own choosing in negotiations and adjustments with employers in respect to wages, hours of labor, and relations and conditions of employment."

Perkins gave the following account of the lead up to inclusion of section 7(a) in the NIRA:

At the earliest opportunity I reported to the President that two fairly complete plans were being mapped out — one by Wagner and Jacobstein, the other by Tugwell and Johnson. They both rested on the idea of suspending the effect of the anti-trust laws in return for voluntary agreement by industries for fair competition, minimum wage levels, and maximum hours. I told him that the plans were not very different and both apparently had gotten around constitutional difficulties. The President asked Henry Wallace and me to get the two groups together. That was arranged, and the conferees met daily. When they had completed their draft bill, the President showed it to me. It was novel. It seemed generally satisfactory, but it had some weaknesses. 

"This is very drastic," I said. "The hours of labor and wages are involved, and I think I ought to get the president of the American Federation of Labor to go over it." 

I called in William Green. He liked some of it but said that no provision was made for collective bargaining. He thought the bill could be used as a method for putting the labor unions out of business. General Johnson took the bill and redrafted it, incorporating Section 7(a), which was meant to assure labor's right to collective bargaining. Written in general terms 7(a) was a problem in semantics. It was a set of words to suit labor leaders, William Green in particular. When they discovered later what could be done under 7(a), they called it "labor's Magna Charta."

Charles Coiner's original design for the "Blue Eagle"

The text of Section 7(a) stated as follows:

Employes shall have the right to organize and bargain collectively through representatives of their own choosing, and shall be free from the interference, restraint or coercion of employers of labor, or their agents, in the designation of such representatives or in self-organization or in other activities for the purpose of collective bargaining or other mutual aid or protection.

The wording of Section 7 of the 1935 National Labor Relations Act (Wagner Act) retained verbatum the wording of the phrase, "[to] bargain collectively through representatives of their own choosing":

Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection, and shall also have the right to refrain from any or all of such activities except to the extent that such right may be affected by an agreement requiring membership in a labor organization as a condition of employment as authorized in section 158 (a)(3)of this title.

Now pay attention to what happened here. Labor bargained for the right to bargain collectively. The A.F. of L. had something -- "support from many parts of the country and from many representatives and senators" for the Black bill -- that William Green exchanged for the inclusion of section 7(a) in the NIRA. Labor owns the right to bargain collectively. They (we) bought it. Nobody gave it to them. Anyone who tries to take that right away is a thief. Got it?

No robotization without representation!

Luddites weren't wrong about losing their jobs, they were just wrong about the economy losing jobs in aggregate. -- Dietrich Vollrath

Dietrich Vollrath wasn't wrong about the Luddites losing their jobs, he was just wrong about them having any opinion whatsoever about "the economy losing jobs in aggregate."

Not only did the Luddites have absolutely nothing to say about such statistical aggregates and macroeconomic concepts, they were equally reticent on matters of quantum physics, Freudian psychoanalysis and the theory of anthropogenic climate change.

In short, not only did the Luddites not travel back in time to torch John Kay's house in 1753, they also failed to express any views on concepts that didn't appear even in rarefied scholarly discourse until the next century.

So why does a laughably anachronistic fable about an alleged Luddite error have such enduring appeal to economists in the twenty-first century? I've been asking that question for twenty years now. I'm pretty sure the answer is important. I doubt that an explanation will have any effect on endless repetition of the fable. Economist want to believe in the fable. Their paychecks depend on it.

One doesn't have to probe deep into the archives to come up with a credible historical account of the Luddite incidents. A good start for beginners would be the overview presented in a seminar paper, The Aims of Luddism: An Historiographic View, for the 2002 NEH seminar on Aspects of the Industrial Revolution in Britain:

Though the character of the attacks differed from region to region, most historians see enough similarities in the tactics and aims of these groups to categorize them under the same rubric. Most importantly, all scholars agree that the Luddites were not anti-technology. This is, of course, counter to the current popular perception of their actions; the term Luddite is used nowadays to denote someone who stubbornly refuses to use new methods and ideas, such as computers. The Luddites were not against machines per se, but against the threat to their livelihoods that some machines posed.

Maybe "all scholars agree" is a bit strong. But you get the drift.

One of the passages from a Luddite document frequently cited by historians to dispute the anti-technology platitude referred specifically to Parliament passing "an Act to put down all Machinery hurtful to Commonality." Commonality is a word, to be sure, but commonalty (without the 'i') was a much more common and significant spelling up until some time after the middle of the twentieth century. Attending to the more usual variant yields a poignant document, Major John Cartwright's radical reform pamphlet, The Legislative Rights of the Commonalty Vindicated or Take Your Choice, the second edition of which was published in 1777:

This is not to suggest that the Luddites were followers of Cartwright, although government officials subsequently imagined or exaggerated links between radicals and rioters. The latter suspicions were the subject of a 1948 article, "Luddism, Hampden Clubs, and Trade Unions in Leicestershire, 1816-17." According to its author, Patterson, several apprehended members of a Luddite gang "tried unavailingly to save their necks by fabricating tales of the complicity of Major Cartwright, Sir Francis Burdett and Gravener Henson (the leader of the Nottinghamshire hosiery workers) in insurrectionary plots."

Who then was this "commonalty" whose legislative rights were vindicated by Cartwright's pamphlet?

Cartwright's radical doctrine ("taken from the plain law of nature, from Scripture and the obvious dictates of common sense...") was that "every individual of the commonalty hath a common and equal right with his fellow-citizens to vote in all elections for the House of Commons." Horrors! Americans who remember their high school civics may detect a family resemblance between Cartwright's argument and the slogan of the anti-Stamp Act rioters of 1765, "No taxation without representation."

In his pamphlet, Cartwright directly cites "taxation without representation" and equates it with tyranny. From the perspective of tradesmen, non-enforcement and repeal of long-standing protective legislation would have same the effect, financially, as taxation. One of the core grievances of the Nottingham stocking-frame weavers was suspension and ultimately repeal of the Elizabethan law requiring seven years apprenticeship to qualify for the trade.

But commonality was and is also a word. What is commonality? Or what was it? From mid-nineteenth century comes a discussion of what commonality is by "Terrigenous," an advocate of "the people's right to land.":

Simply that though each individual has a natural right to inherit the earth as a co-partner in the universal inheritance, no individual has, or can have, a right to absolute ownership over particular spots of earth! That is Commonality in Land—public, general, national property, for ever!

What distinguishes commonality from commonalty may be more nuance and perspective than substance. Faithful representation of the common people might well legislate common property in land. Capitalist "democracy" thus must always be hedged against the possibility of popular rule. The Luddite fable is a crucial part of that hedge, separating the abstract notion of 'legitimate' political democracy from the allegedly economically fallacious, and thus 'illegitimate,' striving for industrial democracy.

Economists aren't just wrong when they invoke the hoary Luddite fable (or its ubiquitous lump-of-labor offshoot). They are disingenuous and deluded. They imagine themselves pontificating profoundly about efficiency and productivity when all they are doing is reciting a rote apology for privilege.

Take your choice: representation and respect or imposition and contempt.

(UPDATE: the link is to a companion piece, The Black bill, Green and the Blue Eagle: "to bargain collectively through representatives of their own choosing" that updates the story to the 1930s and "labor's Magna Charta," section 7(a) of the New Deal National Industrial Recovery Act.)

Do Fiscal Deficits Steal from Future Generations?

We have been witnessing a somewhat muted round two of the debate over the intergenerational effects of fiscal deficits.  Paul Krugman got the ball rolling by enunciating the conventional economic wisdom that “no, debt does not mean that we’re stealing from future generations.”  This incensed Nick Rowe, who insisted that, through the vehicle of debt, “we can take apples out of the mouths of yet unborn future generations, and eat them ourselves.”  And Roger Farmer chimed in  even more strongly: “An increase in government debt always places a burden on future generations.”

I should emphasize that this is not about what use government money is put to; everyone understands that government investment, if it’s productive, can make future people better off, debt or no.  And it’s not about Keynesian countercyclical policy, which in a world of hysteresis can also have long-lasting positive effects.  No, this debate abstracts from all of this and asks, taken by itself, does a fiscal deficit impose costs on future generations?  Krugman says no, that debt is money we owe to ourselves in every generation; the payments and receipts cancel out.  Rowe and Farmer say Krugman is confusing time periods with people: the transfers obviously offset at each moment in time, but the payers and recipients can be from different generations.

So let’s sort this out.  First, we should frame the question just as Rowe and Farmer do: it’s not about time periods, which is trivial, but generations that overlap within time periods.  And let’s also take the issue of what the money is spent on off the table too, since it could be financed either out of taxes or bond issues.  Just examine debt’s effects on intergenerational distribution in an economic test tube.

Consider a world that functions like this: (1) All people are economically indistinguishable except for their age.  There are no economic classes, nations, or any other categories of significance.  (2) People buy bonds for income-smoothing in an uncertain world.  The present value of the bond is its price which is equal to the discounted stream of future payments.  (3) When they circulate in the secondary market, bonds are always purchased from older people by younger people, never the other way around.  (4) People cleverly plan their lifetime earnings and consumption so that, at the moment of their death, the expected value of their bond holdings is zero.  Over a large enough population, collectively, it will be zero.

In this world the government throws a big party, financed by a bond issue.  The current generation finds itself liable for higher taxes for debt service, but at the same time the possessor of these same bonds.  That’s a wash.  But they do get the party, so they come out ahead.

What happens next is that some of these oldsters die, and some new babes are born.  Collectively the oldsters leave nothing for the newcomers except the tax liability.  As more and more of the initial generation get older and see the shadow of the Reaper in the mirror, they sell their bonds to the young.  The young acquire the bonds, but they also part with their money; that’s a wash.  But they still have the tax liability, so they are worse off than they would be had there been no party and no debt.  Moral of the story, the Greatest Borrowing Generation was able to enjoy extra benefits at the expense of Generation Next.  And you could demonstrate that the Nexters would be able to borrow from the following generation in the same manner, kicking the distributional can down the river of time, to really mix a metaphor.  Thus we would witness “time travel” in the sense proposed by Nick Rowe.

Convinced yet?

But there’s another world.  In this one people are exactly the same as before, differentiated only by age.  Bonds are still fairly priced; buying or selling them has no effect on expected wealth.  But we drop the rule that says that only young people can buy bonds from old people, and we especially drop the rule that say that, on balance, people plan their lives so that no bonds are bequeathed to the next generation.

The party remains the same and so does the initial bond issue.  But when it comes time for Generation Next to take the stage there are important differences.  First, the Nexters are receiving many of their bonds for free.  This is a wealth transfer from the older generation to the young.  Depending on the size of the bequest relative to the number of bonds still in the hands of the aging party veterans it can be partially, fully or overfully offsetting.

But that’s not all.  The Greatest Borrowers, even as they approach decrepitude, may purchase additional bonds from the Nexters.  That’s a wash directly, but it can eventually result in even larger bequests.

Note that in both worlds it remains the case that at each moment in time assets are identical to liabilities, so no distributional effects across time periods is possible, but generations overlap in time, and it’s possible for resources to be shifted from young to old or old to young.  The question is whether this generational transfer is actually taking place and in which direction.

So which world is it?  The Rowe-Farmer world is clearly a special case, with no bequests and a strict age structure for bond purchases and sales.  (The latter constraint is more important for Rowe than Farmer, but I’ll leave that aside.)  It is absolutely true that it is possible to model a special case in which they are right and Krugman is wrong.

But in the general case the direction of the transfer is unknown: it could go from younger to older or older to younger or be too small to notice.  And, in case you’ve been reading your Piketty, we do in fact live in a world of bequests.  Meanwhile, according to the Fed’s regular survey of household finances, accumulation of financial wealth continues monolithically right up until retirement, so there must be a lot of oldsters buying bonds from youngsters (or disproportionate purchases of new issues).  In general, then, Krugman is right.

A lot of economic wisdom boils down to knowing whether you’re dealing with a special case or a general one.

More Redux: Robert J. Samuelson Goes After Social Security (And Medicare) Yet Again (And Again And Again And... )

Dean Baker today, to whom I seem never able to link, sarcastically opened his post today at Beat the Press about the column in today's WaPo by Robert J. Samuelson with, "Yes, it's a Monday morning at Washington Pos tand Robert Samuelson wants to raise the retirement age and cut Social  Security and Medicare benefits.  How else ould one begin a week?"  Dean then proceeds to point out that instead of doing these things one could 1) raise taxes, 2) cut payments to a host of way overpaid special interests in the US health care industry, 3) urge the Fed not to prematurely raise interest rates thereby probably slowing growth and tax revenues (not to mention job growth), and 4) or default on the debt.  He admits the latter is mostly sarcastic, but also notes that effectively based on the law cutting benefits to the SS recipients amounts to a default on a promise, so is this better than defaulting on debt held by high income holders of that debt?  Let me add a bit more, as I have done in the past.

So, RJS's column is entitled "Twisted budget priorities." He poses cuts in NIH research funding, funding of the IRS (which will reduce revenues by not catching cheaters), and defense as the prime examples of victims of  all this awful entitlement spending.  He also wants Amtrak and farm subsidies cut, before he launches into all the ways that old age entitlements should be cut (basically listed by Dean).  Amusingly (and in contrast with Dean) he actually does at one point say, "and pay for the rest of government with higher taxes."  This is in the midst of his litany of approved spending cuts (or constraints), led by the proposed  cuts for Social Security and Medicare.  In short, he is simply restating that old fave of the Bowles-Simpson VSPs, the Grand Bargain, in which entitlement cuts are coupled with appropriate tax increases, although he basically admits that "both Obama and Republicans evade this unpleasant exercise." (and well they should)  While, RJS did not specify which taxes, in the old proposed B-S deals the taxes that would be raised would be, ah ha!.fica taxes for Social Security! And, hey, not too long ago while the GOPsters refused to end the supposedly "temporary" tax cuts for high income individuals, they rushed forward to end the actually temporary fica tax cut under Obama (hack, cough!).  So, maybe...

Let me add another point here.  Of course, in Samuelson's discussion of government activities, supposedly in terrible danger due to all those entitlements for old people, he makes no comment about what has been going on at the state and local levels.  Bill McBride at Calculated Risk (need to scroll on the link, sorry to "best private job creation ever').  He reports indeed that indeed the rate of private job creation in the US during Obama's second term has been greater than in any presidential term ever.  Really.  He notes that in three fairly recent terms overall job creation happened at a faster rate: the two terms of Bill Clinton at the top (the second being #1), followed by Ronald Reagan's second term.  What put them ahead overall was that they all featured substantial public sector job growth, with, ironically, that commie socialist Reagan leading the pack on the rate of public sector  job growth of the bunch.  The rate of public sector job growth under Obama was severely negative throughout his first term and has been barely positive in his second term, like two orders of  magnitude lower than under Reagan in his.

Adding to all this in all these cases is what has happened at the state and local levels, where jobs grew substantially in those rivals to Obama's second term, but have only now also begun to grow again very slowly, after also declining sharply in his first term. Let us be clear that none of what goes on at the state and local level has anything to do with old age entitlements, but Samuelson is not even aware of any of this,even if lots of crucial public investments in infrastructure and education go on at this level.  He is lost in his VSP narrative about a non-existent Grand Bargain at the federal level.  In all of it, the one clear thing that he aims at is cutting those benefits for old people, not  noticing (as Dean points out) that an enormous amount of this has to do with out-of-control  medical care costs in general, not related to old people at all beyond the fact that they tend to consume more of that.

Barkley Rosser

Republican Party Platform

"The forty-hour week adopted 30 years ago needs re-examination to determine whether or not a shorter work week, without loss of wages, would produce more jobs, increase productivity and stabilize prices" -- 1968 Republican Party Platform

Thanks to Bruce Bartlett for the tip!

Naomi Klein Thinks Low Oil Prices Can Help Us Fight Climate Change

I’m not joking.  Read this interview transcribed on Grist.  In this first installment, Klein makes two arguments: (1) Because of low oil prices there is less investment in unconventional oil, Arctic oil and fracking, and (2) Low oil prices give us a convenient opportunity to introduce carbon taxes because people are used to high prices.

The first is crazy.  The main reason for low oil prices is the expansion of supply in a decelerating global economy.  If supply expands in region A and this crowds out investment in expanding supply in region B, supply still expands.  It is more supply and more fossil fuel consumption that will fuel climate change.  There is a slight benefit from substituting less carbon-intensive sources, like conventional oil deposits, for more carbon-intensive ones, like the Alberta oil sands, but the difference is hardly sufficient to qualify as progress against climate change.  I suppose Klein thinks declining economic growth in the continuing aftermath of 2008 is a good thing, but that’s another argument I've already thrashed out.

Ah, you say, but with lower oil prices and less investment in new sources of supply, eventually supply must stop growing, and prices will go up again.  Yes, of course.  This is a normal investment cycle, and it will put us back to where we were when oil prices were high.  In the meantime we will have had this hiatus of lower prices and higher-than-otherwise consumption.

The second is only slightly less crazy.  First, there is no real-world evidence that the price of oil plays a role in the political ability to introduce a carbon tax or permit system.  In fact, insofar as high oil prices (when they’re high) represent scarcity rents, a tax or auctioned permit functions in part as a transfer of that rent from fossil fuel companies to the public, so you could make a case that high prices are politically beneficial.  Of course, there’s no evidence for that either.

The deeper point is that the fossil fuel consumption patterns we saw in the world during the period of high oil prices were not nearly sufficient to put us on a path to avoid catastrophic climate change.  We will need much higher costs to consumers to do that.  Will people be happier about $15 a gallon gas if the starting point is $2 rather than $4?  Your call.

Libertarian Paradise in Greece

Never let a crisis go to waste.  The depression in Greece has made the old rules unenforceable, and free-market economics has arisen to fill the vacuum.

For proof, see today’s New York Times, which has a heart-warming story about disruptive innovation in the Greek health care sector.  Bloated public hospitals have seen their budgets slashed, and one of the results is that overpriced nurses aren't roaming the halls any more, looking for the occasional task to keep boredom at bay.  No, there is now a lively market in nursing, where patients are empowered to seek out the nurses at their preferred price point and pay them only for the work they perform.

One of the beneficial byproducts of this development is the undermining of Greece’s system of requiring nurses to attend (equally bloated) universities in order to obtain licenses.  Economic theory proved long ago that licensing is simply a ruse that pampered professionals put forward to justify their unearned rents.  Once professional work is firmly placed on a market basis reputation will be sufficient to achieve an efficient level of consumer-driven quality.

You might object that the Times story presents these developments as a catastrophe, not a renaissance.  That’s because most of their sources are these same moochers from the public trough, while the few hard-working free-market nurses they contacted were clearly intimidated by the threat of reprisals from the all-seeing state.  Naturally, those who are disrupted are against disruption: that’s the innovator’s dilemma.

Will it take a depression to bring the same reformist spirit to America?  How long must we wait until American hospital patients are free to choose their own nurses and parents are free to choose the teachers and schools they want for their kids?

The Ongoing Division of Libya: Cyrenaica and Tripolitania Redux

Nearly four years ago the former Qaddafi regime of Libya was in the process of disintegrating as many internal  rebels, backed by foreigners mostly from European nations formerly implicated in colonial shenanigans, were on the rampage.  At the time there appeared to be a major split between the more pro-rebel eastern part, with its capital at the later more notorious for other reasons, Benghazi, and the more western and pro-Qaddafi part, with its leading city the official national capital, Tripoli.  In March of 2011 I posted on the situation, noting that this division reproduced a deep historical split between the ancient Roman provinces of Cyrenaica in the East and Tripolitania in the East, rarely politically united and having substantial ethnic and religious divisions (more Berbers in the West, with Qaddafi being mostly an "Arabized berber," followers of the Melki variety of the Shari'a Sunni code in the East, also a major home of the originally modernizing Salafist movement and close to Egypt).  I shall not repeat here all the historical stuff in the link.

So, I had not thought about this for awhile until I just read a month old The Economist from Jan. 7, which had a big and interesting story on Libya, plus some maps.  Even though I had predicted it, I had not realized it had returned, but there on p. 22 of this 1/7/15 issue, there it was, a map showing current reportedly "unraveling" Libya, split in half near the old boundary, with the article even raising this old issue of the deep historical differences between the two and how this is a factor in the ongoing falling apart of  Libya, ruled in the West by fragmented Islamist militias, while portions of the East are ruled by a remnant of the supposedly official government and remnant military, many of whose leaders originally came from there, with troubled Benghazi arguably the main point of  struggle between the two, with the local university substantially burned down and destroyed.

I realized that many Americans, including me, have not been on top of this sad situation and how it has fallen into this very old pattern.  As it is, we must realize how American discussion and policy have simply degenerated into rank silliness and stupidity.  I really must admit that I cannot blame the Obama administration for not publicly saying a word about what is going on there, although I suppose there are people in the US government paying attention while saying as little about it as possible.  Obviously the reason nobody says anything of any significance now about the place in the US is that all discussion of the place has been hijacked totally since late 2012 by Republicans ranting about the events that occurred on 9/11/12 in Benghazi, which particularly involved the murder of the then US Ambassador, Chris Stevens, whose family said his death should not become a political issue, but, hey, who gives a what about what the family of a dead ambassador says when there is a political hot dog to cook for years and years and...

Yes, it is still ongoing.  I am not sure exactly how many of these investigations have been carried out.  The most important recent one was done for two years by the House of Representatives Intelligence Committee, chaired by Republican Rep. Rogers.  While criticizing a failure to defend the facility where Stevens was located (and the nearby CIA facility), they essentially dismissed the numerous conspiracy theories involving Obama and Hillary Clinton somehow messing things up and causing the deaths, and then covering up all their awful and treasonous malfeasance.  But, that has not shut things down.  The Congressional GOP leadership quickly distanced itself from this study, and suported a new super committee by Rep. Trey Gowdy from South Carolina, providing him with an unilimited budget and no time limit.  Dems on the committee have complained that, contrary to previous practice on these committees, Gowdy has been interviewing witnesses without telling the Dem members at all.  Surely if they keep at this, they might find something, I mean something!!! with which to blame Hillary for the death of Amb. Stevens.

(I cannot resist adding a small point I have posted here on numerous occasions, which the committee partially reinforced.  They admitted that the "lies" Susan Rice supposedly told about the events that evening being triggered by a riot over a video was what she was told by CIA and not some coverup (although charges of that led to her stepping back from becoming Sec. of State).  What the committee still could not quite come to accept is that in fact while the local Islamist rads had been plotting for some time to attack the CIA facility, it was indeed the infamous video and riots in Cairo that same evening that provided the immediate trigger as openly stated by figures who led what happened.  It remains a bit unclear whether they knew ahead  of time that Stevens was in the smaller facility, where he once headed the de facto US embassy in support of the rebel government prior to the fall of Qaddafi, but, heck, so what?  Clearly what matters is that Hillary and Rice and Obama... !!!)

In the meantime, who gives a whatever about what is going on in Libya right now, although I suppose it is comforting to  know that history repeats itself, and an old and familiar pattern is reappearing on the ground, if not fully recognized officially.

Barkley Rosser

Walls Have Ears: Wednesday’s Private Meeting between Wolfgang Schäuble and Yanis Varoufakis

The the post-meeting press conference was pretty dispiriting, but behind closed doors there was a clash of weltanschauungs.  I’m privy to everything and can report it as it was.

YV: On behalf of my government and from my own personal, deep respect, I’d like to say hello and convey my wishes for collegial, constructive work.

WS: Please pull up a chair.

YV: Before we get down to business I want to make it clear that, while I come here as a representative of the Greek government, I am not interested in trying to reach a deal that’s good for Greece but not Europe as a whole.  In fact, I think we can find a solution that is really in the interest of the German people as well as the Greek people.

WS: That’s good.

YV:  So let’s begin.

WS: Yes, I was hoping I’d hear that.

YV: As you already know, my government has a clear mandate from the Greek people to seek a new debt arrangement, one that can allow our country to emerge from an economic nightmare.  Of course, we don’t expect that this will be quick or easy.

WS: This discussion may be quicker and easier than you expect.

YV: This isn't a meeting to find a solution.  I just want to put some ideas on the table and talk about how we can go from here to set up a constructive dialog.

WS: Young man, take that smile off your face.

YV: All right, this is not the tone I was hoping for, but we won’t let that get in the way.  As I was saying—

WS: I know all about your ideas.  You tell them to the whole world in your blog.

YV: Yes, but now we are going to discuss the ideas of the Greek government, which are not exactly the same as mine, but which I am going to express as well as I—

WS: I don’t think the answer will be any different for your ideas or the ideas of Tsipras or anyone else in your party.  Let’s get to the point.

YV: As you wish.  The point is that Greece cannot repay the loans under the terms it faces.  We can’t afford any longer to pretend that this program is working; it’s not working for us, and it’s not working for you.

WS: We disagree.  Greece is repaying the loans as we speak.  You are making payments.  You have a program to follow.

YV: We are taking on ever more debt to maintain the illusion that we can repay the existing debt.

WS: Yes, and you will have to repay that debt too.

YV: We cannot repay what we cannot repay.

WS: You are not at the end of your means.  Your government chose to borrow the money, and now you must live with the consequences.  It is the same for everyone.  No one is allowed to escape the responsibility of repaying their debts.

YV: Do I have to remind you of the wise decision the Allies made to release Germany from—

WS: Don’t give me lectures on German history, young man.  That was different.  I don’t think it’s such a good idea for the Greek finance minister to come here to request special favors and then give us speeches about something we know far better than you do.

YV: Well then—

WS: I told you not to smile.

YV: Right.  Where were we?  Oh yes.  Let’s not talk about the debt right now.  As you know from reading my blog, I think that Europe as a whole can take responsible actions to pull all of our economies forward and reduce debt burdens through growth.  I’m talking about a substantial expansion of the European Investment Bank financed by bond purchases by the ECB.

WS: I know.  You think wealth can be created by printing money.  We think wealth is created by hard work and frugality.  When you start saving your own money you can talk about making investments.

YV: I take this as a signal you aren't interested....

WS: You’re getting better.

YV: Well, let’s try something else.  Syriza, as you know, was elected on a platform of radically reforming the Greek state and subjecting the oligarchy in our country to the rule of law.  We want to make it possible to collect taxes on the wealthy, to have honest bidding for government contracts, and to—

WS: Yes I know.  We will help you collect these taxes, but you didn't come here for that.  I want to know right now: are you going to go through with the privatizations you've agreed to, with further reductions in public employment, rescind these ridiculous wage increases—

YV: Sir, we were elected.  We have a mandate.  This is democracy.

WS: We know something about democracy too, Dr. Varoufakis.  And people are free to express whatever opinion they want.  That’s the democratic way.  But voting for this party or that one doesn't change reality.  And the reality is that you have to follow the program.

YV: If we have to do what you tell us no matter how we vote, what’s the point of voting?

WS: As I said, voting does not change reality.

YV: But voting has already changed reality, and not only for Greeks but Germans as well.  Germany’s economy depends on its exports to us and to the other indebted countries.  In fact, these are two sides of the same coin: our debts financed your exports.  It’s basic macroeconomics, surely you can agree with that.  Our economies are intertwined, what happens to Greece—

WS: No, you’re wrong.  German exports have nothing to do with Greece; they are due to the productivity, the hard work of the German people and their willingness to save for the future.  There are no shortcuts, Dr. Varoufakis.  When Greeks learn how to work hard and save they will have a successful exporting economy too.  And it’s the same for every country.  And if you don’t like listening to us telling you this, you are perfectly free to refuse our generous support and let your economy go to hell.  We will sell our goods to someone else who is more responsible.  And one more thing.  You have a lot to do in Athens.  Don’t bother scheduling any more meetings in Berlin.  If you noticed the little message you got from the ECB, your days are numbered.  You will be heroes for another week or two, and then I can schedule a meeting with the finance minister of the next Greek government.

YV: This isn't going anywhere, is it?  What are we going to tell the press in a few moments?

WS: We agree to disagree.

YV: I don’t think we even got to that.

WS: Do your job.  This is what we always tell them.  Oh, and one more thing.

YV: What's that?

WS: Tuck in your shirt.

Draghi: Let’s Turn this Bank Run into a Stampede

Sorry, I think Paul Krugman’s grad school friendship with Mario Draghi has blinded him to the obvious.  Syriza, via Varoufakis, has refused the latest tranche of its “bailout” loan because it is convinced it can continue its debt payments past the end of February with its own resources.  That’s supposed to give it negotiating time.  But the real ticking clock is its banking system.  There has been a steady, persistent run on Greek banks, with deposits down 6% in the month before the latest election.  No doubt the rate has accelerated since then.  And now the ECB has announced that one of its two funding facilities to backstop the Greek financial system has been shut down until further notice.

You can debate what this means technically, whether the ECB’s emergency liquidity assistance (ELA) is large and credible enough to do the job, but the primary effect will be to turn the bank run into a rout.  That appears to be the intent.  This will presumably demonstrate to Syriza that the game is up, and there is no alternative but to stop making demands and get back on the program.  You would have to do a lot of analytical gymnastics to conclude, with Krugman, that an engineered Greek bank run is really just a covert message to Germany to be more reasonable.

The moment of decision for Syriza is not later but now.  Capitulation is out of the question.  The only choice is to formulate its own plan, separate from the ECB, to cope with the collapse of its banks.  I hope they recognize that direct attempts to stop the run through capital controls and withdrawal limits are a form of political suicide: if depositors are denied access to their funds the government will not last another week.  The task is to develop a source of funding that does not require prior withdrawal from the eurozone.

Meanwhile, it is difficult to express how utterly wrongheaded this latest ECB move really is.  It is one thing to equivocate about being a lender of last resort, another to foment a bank run on purpose.  Sort of like the fire department in Fahrenheit 451.

Update On Saudi King Salman's Condition

Some time ago I also posted on reports in the Washington Post that newly elevated King Salman of Saudi Arabia is suffering from dementia.  This claim appeared in the Jan. 24 Washington Post, which quoted Simon Henderson of the Near East Policy Institute.  Apparently today the Post has now retracted this story and declared that the claim was "speculative" and not supported by further evidence. This was reported with more details on Crossroads Arabia.

I had speculated that one possible motive for Obama's visit to Riyadh was in fact to personally check out this rumor.  They apparently met for a full hour together.  No reports came out of that of any dementia. Anyway, it appears that somebody misled Henderson, and the WaPo is now admitting that he misled them, for whatever reason.

Barkley Rosser

Update, Feb. 4:  In today's WaPo there is a large, highlighted column by closely-connected-to-the-White-House, David Ignatius, clearly an effort to offset their embarrassment over the Simon Henderson affair.  It is based on an article in London-based al-Sharz al-Aswrat, which is owned by King Salman's family, so the source must be considered.  But it is all praise of the new crowd in Riyadh, particlarly Salman's 34-year old son, Mohammed, now Minister of Defense and Chief of the Royal Court.  He is depicted as really running the show and being super competent and also super-friendly with the US, as is new Deputy Crown Prince Mohammed bin Nayef, both of them second-generation Sudairis.  Nothing is said about Salman's health, but the photo of him accompanying the column has him looking strong and alert.

Is Oil Moving Out Of The $45-$50 Per Barrel Window?

As of yesterday the Brent crude oil price rose above $50 per barrel, and today the West Texas Intermediate (WTI) followed it above to nearly $52 per barrel while Brent is up to nearly $57.  Several weeks ago I called a bottom to the oil price at $45, which did get down to $44 twice briefly.  This was based on the public statements made in November by leading Saudi figures that they were planning their budget on an oil price within this particular window.  Of course, it is no problem for the Saudis see a price above the top end of this window.  It certainly makes their budgeteering easier, and making them more money.  The more serious part of the matter was their calling of the bottom, which now looks much more like it is going to stick for awhile, even this price surge stops soon.

I am not going to provide any links for this post, but have gone dredging around through various sources and posts.  The upshot is quite a hodge podge of forecasts and trends.  Nobody is calling for a fall below $45, although some are talking about a window of $45 to $55 (for the WTI).  The clear immediate cause of the price rise is a report of an unexpectedly sharp fall in the number of drilling rigs in the US fields.  This seems to have led to an exit of the shorts, although for how long?

Some analysts claim the price could go to $61 and stay there or near there.  For  the Brent price, that is not too away, so certainly could happen.  More dramatically at the far high end, although this is not a near term forecast, OPEC Secretary-General as-Badri has told BBC that the price could go to $200 per barrel.  Well, maybe, but indeed probably not in the near future, and Saudi figures have said that we shall not see $100 per barrel price again, or at least not any time soon.

On the other side, there are some near term factors that could hold the price down or even push it back down.  One is that apparently Chinese demand has fallen and inventories near China are up.  Furthermore, inventories at Cushing, OK have reached an all time high.  It may be that awareness of this on-the-ground situation rather than forecasts of what may happen months from now as the supply cutbacks gradually come in, that has held the WTI price further behind as speculators in Europe have pushed up the Brent price on the basis of these reports out of the US.

So, there are lots of possibilities, although nobody is calling for a sustained price below $45 anytime soon.  That looks indeed like the bottom, more or less.

Oh, and I have heard that Russian media figures are claiming the price will go to $70 per barrel or above by March.  This seems a bit overly optimistic for their position, although apparently that is a major cutoff for some of their  production fields to make a profit.  But, I am not going on further at this time or place on how reliable statements or forecasts possibly involving wishful thinking coming out of Russia are.

Barkley Rosser

Updtate, Feb. 4:  Well, this recent price surge may be over.  WTI is down to $50.37 per barrel as of a few minutes ago, just barely out of the $45-$50 window.  It has moved down more than Brent crude, which is now nearly $6 higher than WTI.  Given that reportedly the uipward surge was based on deelo;pments in the US, what is happening with WTI may be more indicative of the underlying situation.

Oh, and linking my last two posts, there is now a report floating around that indeed the Saudis are consciously acting to keep the price lower in order to pressure the Russians to make nice in Syria and reduce their support of Assad.  I think that remains to be seen.

Later 2/4 update:  Promise this will be the last for this thread, but end of day WTI was at $48.40 and Brent at $54.64 or something like that, more than a $6 gap, which was less than a dollar a couple of weeks ago.  Anyway, WTI is back in that $45-$50 corridor for now, even if Brent is still ousside it. Will it stay there?  I am not going to comment or forecast further unless somebody else does in the comments, which nobody has bothered to do so far.  But, there it is.